JPMorgan's First Republic Buy Is Eerily Similar To Its 2008 Bear Stearns Purchase

JPM Got Loss Protections For Real Estate Loans As Property Market Weakens

First Republic Bank branch

Justin Sullivan / Staff / Getty Images

JPMorgan's (JPM) deal for First Republic Bank (FRC) is reminiscent of the deal the banking giant negotiated to acquire Bear Stearns as the 2008 financial crisis unfolded.

Key Takeaways

  • JPMorgan's acquisition of First Republic is similar to its Bear Stearns purchase as both deals provided loss-share agreements against real estate loans.
  • Government finance, though structured slightly differently for each deal, was another common thread between First Republic and Bear Stearns deals.
  • Commercial real estate loans could hurt regional banks going forward as delinquencies rise.

Loss Share Agreement On Property Loans

Jamie Dimon might be having deja vu.

JPMorgan won the auction to acquire First Republic after the Federal Deposit Insurance Corporation (FDIC) seized control of the troubled regional bank, in a deal that was finalized over a weekend.

Other than control of the assets, the deal included loss sharing agreements with the FDIC that cover 80% of losses on single-family mortgages for seven years and 80% of losses on commercial loans, including commercial real estate, for five years.

Similar protections were part of JPMorgan's purchase of Bear Stearns, which also was negotiated over a weekend, but its important to note that Bear Stearns wasn't placed in receivership.

"This transaction type gained prevalence in 2008 primarily because of buyers' concerns related to residential and commercial real estate," wrote John Popeo, a partner at The Gallatin Group in an email to Investopedia.

Exposure to commercial real estate loans (CRE) has become a cause for concern for regional banks, as delinquencies have risen to multi-year highs. It begs the question of whether a deal such as this holds clues for things to come.

"I do not view the inclusion of shared-loss coverage here as necessarily the harbinger of a collapse in commercial real estate," said Popeo. "That said, CRE does appear to be a problem, and it is one that could prove formidable for smaller banks."

Government Financing

The FDIC's sale of First Republic resembled the Bear Stearns sale in another way: The government provided financing.

"This deal was a bit reminiscent of Bear Stearns in terms of the government providing a credit facility to the buyer as part of the transaction," Popeo said.

He explained in the Bear Stearns deal, the Fed created an almost $13 billion overnight discount window loan for JPM on a non-recourse basis, using about $13.8 billion of Bear's assets as collateral.

The FDIC will provide a $50 billion five-year fixed-term financing to JPM for the First Republic deal.

"This is different from the Fed facilitating a Discount Window loan but has parallels in the government's approach," Popeo said.

When JPMorgan bought Bear Stearns, one particular piece of real estate was worth more than the price paid for the whole bank: Bear's recently built New York headquarters building, valued at more than $1 billion.

This time around, JPMorgan's First Republic purchase will allow it to expand its wealth management business and take on income-producing real estate loans with the FDIC's loss-sharing deal reducing the risk.

The Deal's Done: What's Next?

With the Fed intent on raising rates till inflation can be tamed, the probability of the economy heading into a recession remains elevated. Irrespective of a recession, trouble may be far from over for regional banks.

Dimon's deal may prove prescient if the dire warnings of investors and analysts about the property market prove true. Office and retail landlords in particular face challenges from work-from-home and shop-from-home trends.

“A lot of real estate isn’t so good any more,” said Charlie Munger, Warren Buffett's partner at Berkshire Hathaway (BRK.A), in an interview with the Financial Times. “We have a lot of troubled office buildings, a lot of troubled shopping centers, a lot of troubled other properties. There’s a lot of agony out there,” Munger said.

Banks, especially those with large property loan portfolios, are tightening up their lending standards amid the bank turmoil that started with the collapse of Silicon Valley Bank and the FDIC takeover of Signature Bank, and now, the quick takeover and sale of First Republic.

The price of a quick deal that protects First Republic's depositors and quells public panic may be an even greater concentration of banking assets in a small number of "too-big-to-fail" banks, said Dennis M. Kelleher, CEO of Better Markets, a nonprofit founded to push for financial reforms after the Global Financial Crisis.

Article Sources
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  1. JPMorgan. "JPMorgan Chase acquires substantial majority of assets and assumes certain liabilities of First Republic Bank."

  2. CNBC. "A decade after its fire-sale deal for Bear, a look at what JP Morgan got in the bargain."

  3. Financial Times. "Charlie Munger: US banks are ‘full of’ bad commercial property loans."

  4. BetterMarkets. "Time-Pressured, Panicky-Looking Seizure And Sale Of First Republic Bank Again Highlights Fundamental Legal And Regulatory Failures."

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